The World Turns Red

The world has turned red, which is definitely not my color…

The Map

Everyday the red blobs on the now infamous Johns Hopkins Covid-19 map get bigger and bigger. Except Russia, oddly enough – what’s going on there? A new study publishes daily that makes us either more worried or more complacent. Almost 20% of the American population is now under a direct order to stay inside and shelter in place (Tennessee begins shutdowns today). Even so, Dave Ramsey has continued to keep his business fully staffed – keeping Franklin Tennessee’s civil libertarians all tied up in knots (note, this may change as of .

It’s been a full 4 months now since the first case of Covid-19 was documented in China. I’m so old I remember when they called it the Wuhan Virus. Yes the virus originated in China, though we are no longer allowed to say that for fear of upsetting someone.

Attack!

At least one study now suggests that had China acted in a prudent manner 95% of the virus’ spread could have been contained. Instead China lied. They falsified numbers, covered up the crisis, jailed those who tried to publicize it, placed the blame on the US for creating a bio-weapon, and basically handled the manner like a well-oiled Communist regime. Now the world pays the price.

what is up with these guys?

I think an awesome package of stimulus + retribution would be a demand the Chinese government return the US Treasury Bonds they own. This would equate to a $1 Trillion stimulus package in the US and hit the Chinese squarely in the pocketbook.

The Markets

Every country stock index in the world is currently red – down double-digits on the year, with the exception of Poland which rides +4.5% YTD. I can’t explain why they have been immune, is it the Pierogi? Oddly enough China is a down mere -17% YTD (you tell me), while the US is down -35% YTD, the UK & Germany both down -40%, and Norway down a whopping -50% YTD (due to the dramatic drop in oil prices).

This is what your 401k looks like. China in the white shirt, Steve Mnuchin on the left.

A silver lining? If you’ve been thinking about investing but you’ve been scared about a crash or scared of losing money this is your chance! Roll back the prices to 2016 levels or possibly before! You get a do-over and procrastination will pay off for you – this time. Ten years from now this will be a big dip and a big recovery.

This is what the long haul looks like

If you want the easiest “set it and forget it” type of plan out there, open a robo fund at Schwab or Betterment. This will spread you out all over the world with a mix of all types of asset classes. This will ensure that as the world rebuilds from this gut-punch you will ride the waves back up, no matter where they happen. This will be your fastest and simplest way to enter into a widely diversified investment strategy. Other options would be a Target-Date Fund, or you could go to Fidelity and buy their two free funds.

An example of a Betterment robo-portfolio for a 30 year old.
An example of a Schwab robo-portfolio set to the most aggressive mix possible.

The Road Ahead

I see a lot of investors turning red on social media. They are getting real panicky. Reason? They don’t have a plan. If you’ve put in the work and you’ve put in the effort, you will have a plan that is in action as we speak. For most, the best plan is to follow that of the late, great, Jack Bogle. He wrote; “My rule — and it’s good only about 99% of the time, so I have to be careful here — when these crises come along, the best rule you can possible follow is not “Don’t stand there, do something,” but “Don’t do something, stand there!”

I will take this time to note a few bad plans: Watching Mad Money with Jim Cramer, watching MSNBC, subscribing to Motley Fool, relying solely on Zero Hedge, and taking tips from a friend who has a friend – especially if that friend of a friend works for any one of the following – Goldman Sachs, CIA, FBI, BoA, CNN, a major university, a doctor in California, or a gold mine.

Remember to view the market in long chunks of time. I prefer to look at 5-10 year horizons instead of the incessant chatter of the daily news breathlessly talking about point drops and market tumbles. Sure, you may be down 35% on your investments this year, but if you’ve been in the market over the past 10 years you’re still up 145% and that’s inclusive of the recent market capitulation! If you get in and stay in chance are you will make money. US equities are the best performing asset class over the last 10 years, followed closely by Real Estate Investment Trusts (REITs).

from Ben Carlson – for a 20-year asset quilt click here

The Predictions

These are worth what you pay for them, and maybe slightly less. However, here are some predictions on how this plays out.

  • Covid-19 sticks around for a while. This does not end after 2 weeks of social distancing and then we magically all go about our lives. This is here to stay and we will have to find a way to work with it and around it.
  • There are a lot of well-capitalized companies trading well below the value of the future cash flows they will produce. Investors who can find these companies are going to do really well as the market recovers. Warren Buffett sits on $130 BILLION in cash. What you do with that nugget of information is up to you.
  • There are a lot of under-capitalized companies that will go bust. Companies are not designed to see their earnings go to zero inside of a month. Many companies have revolving lines of credit (revolvers) that they can tap into to smooth the gaps of choppy income & earnings, but these revolvers are tied to baselines of earnings and cash flow. Once those covenants are broken, banks are not going to be willing to keep these revolvers open. Between now and the end of the year this is going to become a major issue, especially for consumer focused companies. Restaurants, hotels, casinos, and discretionary businesses are in a tight spot.
  • We will enter into a recession. GDP will drop dramatically, and the consumer will get crushed via lost wages, job loss, reduced earning power. This means those who live paycheck-to-paycheck with high debt loads are going to feel it the worst. To them it will feel like a depression instead. By summer, things are going to be really ugly on the financial side of things. We’ve only dipped toe in the water.
  • The market will react wildly and sometimes violently. Swings of +/- 10% in a day will be frequent.
  • Our ideas of civil liberties will forever change as result of this crisis. It’s happening now, right before our very eyes. The ensuing government-fueled recovery will strip us of economic freedoms as well. More to come on these thoughts, but some long-held fundamentals of America have radically changed over the past 90 days. Over the next year they will change even more. Buckle up.

The Wine

The La Finca Tempranillo from Trader Joe’s is a really tasty red wine @ $4.49/bottle. It’s at least a step above the 2-Buck Chuck…

Alright, that’s it for now. Smoke ’em if you got ’em – cheers, and thanks for reading! Share your thoughts below!

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